India’s Strong Rupee- Data response:
1. Define the following terms highlighted in the text:
a) Import substitution:
[2 marks]
Precise definition: An economic policy that encourages the creation and support
for domestic industries to produce goods and services that will act as
replacements for imported goods/services. Imports would be restricted by the
use of protectionist policies.
b) Real GDP
[2 marks]
Precise definition: The total output of an economy measured over a period of
time and taking into account inflation.
2. Using a tariff diagram, explain why the introduction of a tariff might
reduce the quantity of imports demanded in India
[4 marks]
For full marks you need to draw a fully labeled diagram (price of cars in Rupees,
quantity of cars) showing domestic supply and demand for cars and a perfectly
elastic world supply curve shifting up due to a tariff. You MUST show the impact
of the tariff on the volume (quantity of imports). In your explanation you must
explain how the tariff will result in a shift in of the world supply curve making
imported cars more expensive and therefore reducing the quantity demanded for
imports.
3. Using an appropriate diagram, explain how an increase in FDI can lead to
an appreciation of the Indian rupee.
[4 marks]
For full marks you need to draw a fully labeled diagram (price of Indian rupee in
terms of $, quantity of Rupee) showing a shift out in the demand for the Indian
rupee and the subsequent rise in price (depreciation). In your explanation you
need to explain why an increase in FDI results in an increased demand for the
rupee as foreign investors need to exchange their currencies for the rupee in
order to invest in India.
4. Using information from the text and your knowledge of economics,
evaluate the increased impact of FDI on the Indian economy [8 marks]
You must use information from the text (IFT) AND your knowledge of
Economics: (KOE)
Points may include
 Positive impact on India’s real output (economic growth) – use a diagram
to show shift out of AD and subsequent impact on output and PL- real
GDP growth rate increased to 9.2% but inflation increased to 6.2%(IFT)&
(KOE)
 Subsequent impact of output increase on employment – reduces level of
unemployment (IFT)
 Causes an appreciation of the currency (refer to Q2) which has damaging
effects on exports (rise in price) and also on domestic industries that
compete against lower priced imports (KOE)&(IFT)
 FDI might go towards industries that make products for the export market
 FDI tends to be concentrated in urban areas therefore exacerbating rural
urban migration problems.
Evaluation could examine the short term and long term consequences,
advantages and disadvantages or the impact on various stakeholders
Examiners should be aware that candidates may take a different approach which
if appropriate should be fully rewarded. If there is no direct reference to the data,
then candidates may not be rewarded beyond Level 2.
Level
0
No valid discussion.
0
1
Few relevant concepts recognized.
Little discussion or only basic understanding.
1-2
2
Relevant concepts recognized and developed in reasonable depth.
Some attempt at application and analysis.
3-5
3
Relevant concepts developed in reasonable depth, demonstrating effective
evaluation, supported by appropriate evidence or theory.
6-8